One of the greatest obstacles for entrepreneurs ready to expand
their businesses is finding the cash to upgrade and buy additional
office equipment. Sinking most of your hard-earned capital into
needed computers, copiers, fax machines, phone systems and
furniture can drop you into a bottomless money pit. Securing a bank
loan is an alternative, but while you can use the bank's money
for your purchases, you may be required to come up with the
standard 20 percent down payment. In addition, bank loans usually
offer little flexibility in the length of the loan, and they may
not be totally tax deductible.

Before begging your reluctant banker for a loan, consider an
option that keeps many small businesses afloat: leasing. According
to the U.S. Department of Commerce, 80 percent of all U.S.
companies lease all or some of their equipment. Most established
businesses prefer leasing to avoid technical obsolescence without
overspending. According to the Equipment Leasing Association of
America (ELA), 77 percent of all leased high-tech equipment in the
computer industry is either replaced or upgraded within 24
months.

Greg Loeschke of Farm Credit Leasing in Minneapolis advises
customers not to confuse loans with leases. "A loan requires a
[company] to invest a down payment in the equipment, or a
first-and-last payment, and to finance the remaining amount,
whereas a lease requires no down payment and finances only the
value of the equipment expected to be depleted during the lease
term," he says. "Securing a loan usually requires the
borrower to pledge other assets for collateral," while
collateral is usually not needed to secure a lease."

Anything And Everything

Think your equipment needs go beyond the scope of most leasing
companies? Think again. Today, you can lease just about anything,
from construction cranes and office security systems to computer
software. Credential Leasing Corp. in Harrisburg, Pennsylvania,
leases medical, printing and production equipment, as well as
construction, communications and office equipment to businesses in
all 50 states, equipment that would range in purchase price from
$1,000 to $400,000.

As more and more business owners realize the vast options
available, many are turning to leasing. John Pantalone, owner of
J.P. Southern Industries in Barrington, New Jersey, started his
commercial horse-racing photography business in 1972, but it was 10
years before he realized the advantages of leasing.

"If I'd known about leasing before I opened my
business, I could have saved myself lots of financial headaches and
needless worry," says Pantalone, 54. "When I opened my
business, I spent agonizing weeks arguing with banks for loans
because I had no company financial statements to show them. I had
nowhere near the $4,000 worth of photo equipment I needed. I
finally managed to find some used equipment I could afford, but it
wasn't my first choice. After I discovered by trial and error
that leasing was an option, I never looked back. After 15 years, I
still lease-purchase photo processors and computers for myself and
six employees. Technology advances so quickly, I need the latest
equipment to remain competitive."

When one of Pantalone's photo-processing units was almost at
the end of its lease, he opted for a buyout, which gave him
ownership; then he turned around and sold it for $2,000. "I
made $1,500 on the deal after buying out my lease for $500,"
says Pantalone.

Pantalone leases through Advanta Corp., a financing company that
services nearly 6 million customers. "We're big, but
small-ticket leases are [also] a very important part of our
business," says Jacqueline Kohler of Advanta, which is based
in Voorhees, New Jersey. "We work directly with businesses and
through manufacturer/dealer financing programs."

That's good news for small businesses, which are getting
into the leasing act more than ever before. The ELA reports small
business is one of the biggest markets turning to leasing.
"Companies that lease now tend to be smaller, growth-oriented,
focused on productivity, and more technology-oriented," says
Suzanne Jackson of the ELA. "These are the companies long on
ideas, short on capital, and in need of flexibility as they grow
and change. They lease for efficiency and convenience."

A Look At The Benefits

Efficiency and convenience are two things small-business owners
can't get enough of. But what else is luring them away from
buying equipment? For businesses that need equipment and need it
now, leases are a speedy alternative. While banks can take weeks to
approve business loans, leases are often approved overnight, with
far less paperwork and looser credit requirements.

"We process lease documents by fax, with fast
turnaround," says Steve Brooks, president of Lease Consultants
Corp. in Des Moines, Iowa, whose company purchases equipment from
dealers and then leases it to customers. "We [offer] credit
approval and authorizations with a minimum of red tape, and
documentation that's easy to understand," says Brooks.

In addition to freeing up your cash and leaving your
conventional lines of credit open, leasing also offers tax
advantages, Brooks points out. Lease payments are usually 100
percent tax deductible as a business expense, while bank loans are
not.

Businesses that have maxed out their credit options and
don't have the extra cash to sink into an assortment of
equipment are finding relief in leasing. Scott Olsen, co-owner of
Colex International, a collection agency based in Huntington
Station, New York, found the toughest part of getting his business
off the ground in 1994 was getting credit. "All I had at that
time was $5,000 and some letterhead. I needed a computer, copier,
laser printer, phone, voice mail and furniture," says Olsen,
41. "My initial inquiries were to my bank for a loan, but they
wanted financial statements, and I had none. My first financing
came through a computer manufacturer, who leased us three units.
Today, with 22 employees, we have 15 leases for more than $100,000
worth of equipment."

Olsen cautions, however, that one drawback of leasing is that he
has to personally guarantee payments. "Still," he says,
"that beats taking a second mortgage on my house."

How It Works

Leasing offers 100 percent financing for equipment, furniture
and other items you may need to run your business. When you lease
equipment, a company, such as the manufacturer, dealer, broker or
financial institution, either buys or already owns the equipment
you order from them. In exchange, you make monthly payments to the
leasing company. At the end of the lease, you typically have the
choice of buying the equipment, returning it or extending the terms
of the lease.

First and last payments are often required upon signing a lease.
Generally, there are three ways to lease equipment:

1. You select and order it, then seek financing through a
lessor.

2. You lease through dealers and vendors who have their own
subsidiary leasing companies.

3. You acquire the equipment from a lessor, which buys the
equipment from the manufacturer, then leases it directly to
you.

Leasing companies charge customers a monthly rate, much like
interest payments on a loan, but the rates are usually low and
depend on the length of the lease, cost of the equipment and the
type of lease you choose. The Lease Rate Factor determines your
monthly payments and shows up on your bill as a percentage,
fraction or decimal equivalent of the cost of the equipment. For
example, a factor of 0.0360 on $5,000 worth of equipment requires a
monthly payment of $180
(.0360 x $5,000 = $180). Leasing companies,
such as Lease Consultants, have rate charts that state their terms
and can schedule payments to be paid on the 1st, 10th or 21st of
each month.

What's Your Type

There are a plethora of lease types available to small-business
owners. Two of the most popular are operating leases and
finance leases. The first has a term that is shorter than
the expected, useful life of the equipment because the lessee is
not expected to use it for long nor do they wish to buy it at the
end of the lease. Operating leases allow you to lease expensive
equipment at a fraction of its total purchase price.

Much simpler is a finance lease, which tends to cost less
because of the longer term and lower residual risk. Typically, this
is a full-payout, noncancelable agreement in which the lessee is
responsible for maintenance, taxes and insurance. However, the
equipment may be considered a depreciable asset and be listed as a
liability on your balance sheet.

A fair market value lease, sometimes called a true lease,
has the most options and is usually recommended for SOHOs, which
sometimes put up a small security deposit and make relatively low
monthly payments. At the end of the term, the lessee has the option
of extending the lease, returning the equipment or buying
it at fair market value. Like most of the
other leases mentioned here, this lease qualifies under IRS
regulations as allowing the lessor to claim ownership and you (the
lessee) to claim rental payments as tax deductions. Why? Because
operating-lease payments are treated as a business expense, not a
liability, and can be deducted immediately from operating
income.

A $1 buyout lease is good if you're fairly certain
you'll want to buy the equipment when your lease expires. While
$1 makes you the owner, monthly payments are typically higher than
with other leases. The terms of this type of lease may differ from
state to state because of certain state sales tax laws that may
view the lease as an installment sale; this can determine who pays
the tax, the lessor or the lessee.

There are several other leasing plans that incorporate some or
all of the above, including seasonal, step-payment and
sales/leaseback plans, that can be tailored to your business's
needs.

Some leases offer a bargain purchase option, allowing you
to buy the equipment for a price determined at the start of the
lease that is substantially lower than the expected fair market
value at the end of the lease. A master lease is a contract
whereby you lease currently needed assets and are later able to
obtain other assets under the same basic terms and conditions
without negotiating a new contract.

And the choices don't stop there. Leasing companies
incorporate their own variations into the general types of leases
noted above to attract businesses looking for the best deal.
Advanta Corp.'s TechSmart program, for example, lets businesses
upgrade equipment without terminating their leases. "TechSmart
provides clients with the latest equipment every 18 months--halfway
through a lease--which gives companies great flexibility to try new
technologies without being tied into three years of
financing," says Kohler.

Lease terms usually vary from six months to six years. Most,
however, are for 36 months and can include periodic maintenance,
insurance and discounts on parts such as toner. To determine which
type of lease is best for your company, you and your accountant
should consider how long you want to use the equipment, what you
intend to do with it at the end of the lease, how your cash flow
and tax situation will be affected, and what your company's
present needs are as they relate to future growth. Some types of
technology, such as state-of-the-art data processing systems, are
updated very frequently, so lease agreements should contain clauses
to cover constant upgrades if your business requires them.

The Investigation

Before you sign any lease, be sure you understand all the terms
and conditions of the agreement. If you decide two months after you
sign the lease that you don't need the equipment or need
another type of equipment, you could be out of luck. Some companies
won't release you from the contract, which could leave you
paying for unneeded equipment for years; others will charge you a
hefty fee to terminate the contract.

Your accountant can help you decide whether leasing is a good
option for you and recommend the types of leases that are good for
your specific needs. Go over the following questions with him or
her, then grill the company you plan to lease from.

What specific types of equipment do I need to grow my business?
How long will I need this equipment?

What can I afford in monthly payments?

How are the payments calculated? Can I get a three- to
five-year cost analysis?

What are the tax pros and cons?

Can I get a sample copy of the lease being offered so my
accountant and I can study its terms at our leisure?

How is this lease terminated?

What are the buyout options? Are they negotiable?

Can I upgrade at no cost? If so, within what time limits?

How flexible is the payment schedule?

Are there any incentive programs available?

What's the average turnaround time on my application?

What are the conditions for servicing or replacing the
equipment? Do you have 24-hour maintenance service?

What are the maintenance estimates on the equipment? Am I
responsible for ordering and paying for replacement parts, such as
printer toner?

Are shipping costs, installation, training or warranties
included in the payments?

Will I be charged documentation fees? What are the late-charge
fees?

Once you've answered these questions, slow down. Don't
jump into the first lease offered. Take the time to shop around for
the equipment you need and the lease that is most appropriate for
your cash flow, business needs and income. When you accept the
delivery, check out the equipment thoroughly to make sure it meets
your specifications. Above all, don't sign up until you
understand every clause in the lease you're considering and its
implications for your future growth. Ask questions and get
responses in writing, if necessary. Leasing office equipment can be
a boon to entrepreneurs who are short on capital but long on
potential; just make sure you understand how it affects your
financial picture and future growth.

To The Source

In most cases, retailers who sell the equipment you're
seeking handle the paperwork for leasing agreements. They may have
their own financial institutions behind them, as does CompUSA
(800-266-7872), a national computer superstore, or you'll be
referred to recommended leasing companies.

You can also find leasing companies by searching in your local
Yellow Pages under "Leasing Service" (most have toll-free
phone numbers) or by calling the Equipment Leasing Association for
a referral of leasing companies in your area that have bona fide
reputations.

The majority of manufacturers of computers, printers, fax
machines and phone systems have Web sites. If you don't know
the Web site address, just type in the brand name, such as Toshiba,
in any of the search engines, and you'll be connected to the
manufacturer's home page. Log on, and you'll find sales and
leasing information. IBM's home page states it has fast and
flexible lease options and lists a toll-free phone number.
Compaq's home page offers details on its leasing program for
its Armada notebook computers through Compaq Capital Corp.

Here is a sampling of leasing companies, as well as some of the
manufacturers that handle their own leasing arrangements:

You do not own the equipment and cannot sell it unless you opt
for a buyout.

A long-term lease can lock you into equipment you no longer
need.

You may prefer to consolidate with a single bank loan to cover
all your office expenses instead of several different payment
plans.

There may be penalties for terminating a lease.

Leasing debts can stress some people out; after all, you're
borrowing money.

If service is poor, you have little recourse.

Equipment insurance is usually not included.

A Tale Of Two Leases

I'll never lease again," says Virginia Bader, owner of
Virginia Bader Fine Arts, an aviation art gallery in Santa Ana,
California, whose experience with a mailing equipment dealer has
soured her on leasing. "I'd always preferred to own my
office equipment and to save up to buy what I need rather than
commit to what seemed like endless payments."

However, when the mail order side of her business suddenly
exploded, she decided to automate it for faster turnaround and
checked out two local dealers. The first didn't respond as
quickly as she liked, so after waiting a few days, with
ever-increasing pressure for customer orders to be filled, she was
ready to sign "anything" when the second sales
representative showed up at her office. But Bader admits she
didn't read the fine print in the lease she took on four years
ago and which still has three years to run.

"The contract was so complicated and obtuse, and I was in
such a hurry because of the business growing so quickly, I just
signed on the dotted line," Bader admits. "A year later,
my business went through a recession, and we made changes in our
direct-mail system. We use an outside mailing company now instead
of sending our catalogues out ourselves, so I don't need this
sophisticated equipment. I tried to have it downgraded to a
smaller, less expensive unit, but the dealer refused to make any
changes. I am still stuck with a lease and equipment I no longer
use. It's sitting in my stock room."

Bader acknowledges she didn't do her homework or think
through the implication of the lease and the potential expansion or
reduction of her company before signing. She was also unaware that
she had to pay extra for a maintenance agreement and that the unit
required new toner, at $129 per cartridge, every six weeks.

"If I'd taken the time to read up on how to lease,
I'm sure I'd have avoided the pitfalls," she says.
"A lot of money was involved here." Bader would consider
leasing again only if she had no other financial alternative.

On the other end of the spectrum is Jerry Linder, owner of
Electro Security Co. in Van Nuys, California, who has only good
things to say about leasing. And he sees it from both sides: Linder
not only leases fire alarms, burglar alarms and other security
systems to his customers, but he is also a lessee himself--of a
computer, several vehicles and the Central Station Monitoring
System his company uses to monitor customers' security systems.
Even if his customers choose a buyout option for their security
system hardware at the end of their leases, he continues to lease
them monitoring services.

"I'm very pleased with our own office contracts,"
Linder says. "Only once did we have a problem with a copier we
leased. It was defective. The service people were very
unsympathetic, so we stopped payment. Eventually, after legal
threats from both sides, the serviceman came by and fixed the
machine to our satisfaction."

Linder recommends reading the fine print in any lease very
carefully: "Some leasing buyouts we looked at were 20 percent,
which was way more than the equipment would have been worth at the
end of the lease," Linder says. "You need to shop around
for the best deals. Our rule of thumb is to lease equipment and
vehicles for two years, then take the buyout option."